Any company that regularly sees stock price movements in the order of double digits on a given day ought to be avoided now.
Volatility as measured by the VIX index is down sharply, making such moves less likely today than a few months ago. Companies still seeing large valuation moves on a given day or ones with potential valuation multiples that do not make sense.
Despite being absolutely destroyed this past year, various Canadian cannabis producers are still seeing high levels of daily volatility reflected in their share prices.
As I stated in the past, the growth projections used to create these companies’ equity valuations were flawed from the beginning. I think expectations for the sector remain outlandish. As such, I see much more pain ahead for investors.
Particularly, I see a significant amount of insolvency risks likely to be priced in over the coming months, as the shakeout from this pandemic will undoubtedly cause bankruptcies in the sector to shoot higher.
For conservative, long-term investors, holding a portfolio of stocks with extremely low insolvency risk factors ought to be a priority at the top of the list. A lot can happen over the course of a few decades.
Ensuring the companies one invests in are in sound shape to survive shocks and thrive post-dip is of the utmost importance. The cannabis sector is one I would again encourage investors to cautiously watch from the sidelines and avoid the temptation stemming from the hype.
Invest wisely, my friends.
